Perfectly competitive markets as the limits of cournot markets

A perfectly competitive, partial equilibrium market for a single homogeneous good with a (bounded) continuum of infinitesimal firms is considered. Cost functions are essentially unrestricted and are allowed to vary smoothly across firms. A sequence (net) of Cournot markets (each with a finite number of firms) which converge smoothly to the perfectly competitive limit in terms of both the inverse demand functions and the distributioon of firm technologies is introduced and it is shown that all markets sufficiently far along the sequence have a Cournot equilibrium and all the Cournot equilibria converge to the perfectly competitive equilibrium of the limit market.     

PROFITABLE STRATEGIC DELEGATION WITH CONJECTURAL VARIATIONS

Firms delegate strategic decisions to managers because they find it profitable to do so. In the product market, when agents make conjectures about the reaction of their rivals to marginal changes in their own strategies, the set of equilibriums can be enlarged with respect to the case of no conjectures. This paper takes a duopolistic linear market parameterization where firms selling differentiated products can delegate either price or output decisions to managers. We show that it is a dominant strategy for firms to delegate no matter whether firms are Cournot or Bertrand competitors, although the equilibrium is not necessarily efficient. Futhermore, in equilibrium Cournot competition is more profitable for firms than Bertrand competition. Finally, requiring consistency in conjectures yields the same outcome no matter what type of strategic interaction and managerial choice there is on the part of firms.     

Strategic interaction between futures and spot markets

We study an oligopolistic industry where firms are able to sell in a futures market at infinitely many moments prior to the spot market. A kind of Folk-theorem is established: any outcome between perfect competition and Cournot can be sustained in equilibrium. We then find that the Cournot outcome can be sustained by a renegotiation-proof equilibrium. However, this is not true for the competitive outcome. Furthermore, only the monopolistic outcome is renegotiation-proof if firms can buy and sell in the futures market. These results suggest, contrary to existing literature, that the introduction of futures markets may have an anti-competitive effect.     

Free and second-best entry in oligopolies with network effects

We compare the number of firms in equilibrium in a Cournot industry with positive network effects and complete compatibility, under free and second-best entry. Under free entry, the firms decide whether to enter the market or not; in the second-best problem, the number of firms is established by the regulator to maximize social welfare (the regulator controls entry but not production). We show that when individual equilibrium output decreases with entry (business-stealing competition), free entry may lead to more or less firms than the second-best problem. This contrasts with the standard (nonnetwork) Cournot oligopoly model, wherein with business-stealing competition, free entry leads to an excessive number of firms compared with the second-best solution.     

Asymmetric equilibria under price cap regulation

This study analyzes the effects of a price-cap regulation on market outcomes in Cournot and Stackelberg duopolies. Although two firms are ex-ante identical, there are asymmetric Cournot equilibria as well as the symmetric equilibrium under the price-cap regulation, when the price-cap level is binding. By contrast, the Stackelberg equilibrium is unique and equivalent to the most asymmetric Cournot equilibrium under a binding price-cap level. We present several comparative statics results with respect to the equilibrium outcomes. The main concern of this study is the welfare effect of a change in a price-cap level. We show that when asymmetric Cournot equilibria or the Stackelberg equilibrium are focused on, a reduction in a price-cap level may be socially harmful even if the price-cap level is more than the competitive price.     

Spatial price discrimination in the unidirectional Hotelling model with elastic demand

The unidirectional Hotelling model is extended to allow for elastic demand functions. A two-stage Bertrand-type model and a two-stage Cournot-type model are considered. If firms choose location and then set prices, agglomeration never arises; instead, if firms choose location and then set quantities, agglomeration arises at one endpoint of the segment when the transportation costs are low enough. Instead, when the transportation costs are high enough, a dispersed equilibrium arises in Cournot. The equilibrium distance between the firms is lower in Cournot than in Bertrand. When the transportation costs are high (low) the Bertrand equilibrium is welfare superior (inferior) to the Cournot equilibrium.     

Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.     

Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility

This paper presents a model of stochastic oligopoly with demand uncertainty where firms endogenously choose entry timing. We examine two extreme types of market structure and show that the equilibrium correspondence that connects them is continous. With two identically sized firms, there are symmetric, Cournot type equilibria where the probability of early entry declines with greater uncertainty, and for low uncertainty two asymmetric equilibria. With one large firm with a continuum of nonatomic firms, there is a unique Stackelberg equilibrium. We conclude that the behavior of a dominant firm with a finite fringe can be approximated by Stackelberg equilibrium.Journal of Economic LiteratureClassification Numbers?: D21, L11.     

Employee share ownership in a unionised duopoly

Profit sharing schemes have been analysed assuming Cournot competition and decentralised wage negotiations, and it has been found that firms share profits in equilibrium. This paper analyses a different remuneration system: employee share ownership. We find that whether firms choose to share ownership or not depends on both the type of competition in the product market and the way in which workers organise to negotiate wages. If wage setting is decentralised, under duopolistic Cournot competition both firms share ownership. If wage setting is centralised, only one firm shares ownership if the degree to which goods are substitutes takes an intermediate value; otherwise, the two firms share ownership. In this case, if the union sets the same wage for all workers neither firm shares ownership. Therefore, centralised wage setting discourages share ownership. Finally, under Bertrand competition neither firm shares ownership regardless of how workers are organised to negotiate wages.     

Free entry and stability in a cournot model

In a Cournot model for a single homogeneous good, we study simultaneously two stability properties of a Cournot equilibrium: the stability of a continuous quantity adjustment process with a fixed number of firms and the stability relative to entry. Under usual assumptions, we show that these two properties are consistent—i.e., there exists an equilibrium that is stable in both senses—and determine quite sharply the number of active firms.     

Optimal cartel trigger price strategies

A dynamical model of industry equilibrium is described in which a cartel deters deviations from collusive output levels by threatening to produce at Cournot quantities for a period of fixed duration whenever the market price falls below some trigger price. In this model firms can observe only their own production level and a common market price. The market demand curve is assumed to have a stochastic component, so that an unexpectedly low price may signal either deviations from collusive output levels or a “downward” demand shock.     

Strategic corporate social responsibility,imperfect competition,and market concentration

We examine the strategic use of corporate social responsibility (CSR) in imperfectly competitive markets. Before firms decide upon supply, they choose a level of CSR which determines the weight they put on consumer surplus in their objective function. First, we consider Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Finally, we show that CSR levels decrease as the degree of product heterogeneity increases in Cournot competition and are zero in Bertrand Competition.     

Strategic Cost Reduction and Cost Revelation

Strategic cost reduction requires cost transparency. When unilateral cost revelation is feasible, strategic cost reduction indeed arises as equilibrium. If it is not feasible, however, credible revelation has to be organized, possibly by a trade association. Then, firms face a prisoners' dilemma: in Cournot duopoly, cost revelation arises as an equilibrium, but hurts firms; in Bertrand duopoly, cost concealing is the equilibrium, while firms would be better off with cost revelation. Since cost revelation is socially desirable (undesirable) in Cournot (Bertrand) competition, it should be encouraged (discouraged).     

Macroeconomic effects of an indirect tax substitution

We study an indirect tax reform in a general equilibrium model with imperfect competition for both the Cournot and the Free entry equilibria. We show that it is possible to attain a positive balanced budget multiplier by means of a substitution of specific by ad valorem taxation. Moreover, although any tax substitution causes higher prices and the flow up of firms in the long-run, the Free entry equilibrium output can increase with respect to that of the Cournot equilibrium. Finally, in contrast with the partial equilibrium, welfare decreasing tax reforms are likely to occur even when the balanced budget multiplier is positive.      

Beyond the need to boast: Cost concealment incentives and exit in Cournot oligopoly

This paper studies the incentives for production cost disclosure in an asymmetric Cournot oligopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitors from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firms is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.     

Downstream merger with upstream market power

We examine how a downstream merger affects input prices and, in turn, the profitability of a such a merger under Cournot competition with differentiated products. Input suppliers can be interpreted as ordinary upstream firms, or trade unions organising workers. If the input suppliers are plant-specific, we find that a merger is more profitable than in a corresponding model with exogenous input prices. In contrast to the received literature, we find that it can be more profitable to take part in a merger than being an outsider. For firm-specific input suppliers, on the other hand, results are reversed. We apply our model to endogenous merger formation in an international oligopoly, and show that the equilibrium market structure is likely to be characterised by cross-border merger.     

OWNERSHIP VERSUS TIMING OF THE GAME

This study examines the impact of timing of the game on the welfare gains of privatisation in the presence of strategic trade policy. We argue that only if the public enterprise acts as a Cournot player will it generate an additional distortion that could outweigh the distortion caused by the oligopolistic behaviour of private firms. But with a first-mover advantage it can serve as an effective regulatory device comparable with a production subsidy. We further show that, in the presence of strategic trade policy, Cournot assumptions are inconsistent with the firms' preferences over the timing of the game. As public Stackelberg leadership is a subgame Nash equilibrium of the extended game with endogenous order of moves, we conclude that it is the timing of the game rather than firms' ownership structure which is responsible for the inefficiency of an international mixed market found by earlier studies.     

Market power and exchange rate pass-through

In this paper we provide new empirical evidence on the relationship between market power, as measured by market share, and incomplete exchange rate pass-through. The role of market power is examined in the context of a Cournot model, which is estimated with data relating to Japan's presence in the US market. To test for the existence of possible aggregation biases due to sectoral heterogeneity, estimations are carried out on time series data for the total economy and the manufacturing sector and on panel data for five manufacturing industries at the three-digit level of classification, using the Johansen multivariate cointegration technique and the recently developed by [Larsson, R., Lyhagen, J., & Lothgren, M. (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109–142] multivariate panel cointegration technique. Hypotheses about the degree of pass-through are tested as restrictions on estimated equilibrium pricing equations and robustness tests are performed. The empirical results indicate that Japanese firms have market power and this validates the use of an imperfect competition model. However, it appears that market power is not the only element on which to base the analysis of the incomplete exchange rate pass-through by Japanese firms.     

Stackelberg Beats Cournot — On Collusion and Efficiency in Experimental Markets

We report on an experiment designed to compare Stackelberg and Cournot duopoly markets with quantity competition. We implement both a random matching and a fixed-pairs version for each market. Stackelberg markets yield, regardless of the matching scheme, higher outputs than Cournot markets and, thus, higher efficiency. For Cournot markets, we replicate a pattern known from previous experiments. There is stable equilibrium play under random matching and partial collusion under fixed pairs. We also find, for Stackelberg markets, that competition becomes less intense when firms remain in pairs but we find considerable deviations from the subgame perfect equilibrium prediction which can be attributed to an aversion to disadvantageous inequality.